Centralized purchasing explained: Benefits and how to implement

If your business lacks a centralized purchasing system, you could be overspending. Centralized purchasing consolidates your procurement activities into a single, cohesive system to find cost savings and better control the purchasing process.

A strong centralized purchasing process helps you take advantage of volume discounts, reduce maverick spend, and maintain better vendor relationships.

What is centralized purchasing?

Centralized purchasing, sometimes called centralized procurement, is a strategy that consolidates an entire business's purchasing activities into one central department or team responsible for all procurement activities. You’re most likely to find centralized purchasing at:

• Large corporations
• Government agencies
• Healthcare systems
• Higher education institutions
• Chain retailers
• Restaurant franchises

Say a business has multiple departments, all separately buying the same supplies. Each one negotiates prices, manages inventory, and deals with suppliers on its own. This can lead to duplicate spending, varying prices, and inefficient resource use. This is known as decentralized procurement.

With centralized purchasing, one dedicated team manages all buying for the entire organization. They negotiate with vendors, set standard prices, and keep track of inventory for everyone. This ensures consistency, reduces costs, and makes the procurement process smoother.

Centralized purchasing example

Let’s use an example to illustrate further. A family-owned restaurant chain has five locations in the same city. The owner negotiates with local farmers and food distributors to supply all the restaurants. This allows the business to obtain better pricing through volume discounts while ensuring consistent ingredient quality across all locations.

The centralized procurement process also simplifies operations by requiring only one person to manage supplier relationships rather than having each restaurant manager handle their own purchasing.

Signs you need a centralized purchasing system

A centralized procurement system could be the answer to issues you’re facing with purchasing. If you’re experiencing any of these pain points or triggers, it’s probably time to consider centralizing your purchasing:

• Multiple departments buying the same items independently: Redundant purchases across your organization are both inefficient and costly, and likely lead to waste
• Lack of spend visibility and control: It’s hard to see the big picture without a central view of how you spend your money, so you can also track trends and make budget decisions
• Inconsistent supplier relationships: When different departments negotiate different terms with the same vendor, it leads to confusion and weakens your bargaining power
• Compliance or budget control challenges: Decentralized purchasing increases your risk of unauthorized purchases, which makes it harder to keep your budget in check
• Difficulty negotiating bulk discounts: When you don’t consolidate your purchases, you’re not able to negotiate for discounts based on ordering in higher volumes

Let’s say a mid-sized hospital system has a decentralized procurement model, with different departments making their own orders. The cardiology team has been ordering medical supplies from a particular vendor for years and has negotiated favorable pricing. Without knowing, the neurology team is now also purchasing from the same vendor, but at a higher cost.

The inconsistent contract terms and lack of consolidation make it difficult for the hospital's finance team to track the budget and negotiate on behalf of all departments, which can lead to cost savings for everyone.

Benefits of centralized purchasing

Centralized procurement offers numerous advantages that can transform your procurement process and boost your bottom line. These key benefits make this strategic approach worth considering for businesses of all sizes:

• Cost savings through volume discounts: Increases buying power, allowing you to negotiate volume discounts and better terms with suppliers
• Improved spend visibility and reporting: Provides comprehensive oversight of all company spending, making it easier to track budgets, identify trends, and ensure policy compliance
• Stronger supplier relationships and negotiating power: Fosters stronger partnerships, often resulting in better service levels, prioritized deliveries, and collaborative opportunities
• Enhanced compliance and risk management: Allows for better enforcement of company policies and approval processes, reducing the risk of maverick spending
• Streamlined purchasing processes: One procurement process speeds up order times, reduces duplicate orders, and lowers the broader administrative burden on teams

Cost savings and volume discounts

Centralized procurement enables better pricing because you’re able to:

• Consolidate multiple orders across departments or locations
• Negotiate higher volume discounts and leverage lower per-unit costs
• Minimize duplication of orders

This leads to better forecasting and budget controls. In fact, according to Supply & Demand Chain Executive, companies with centralized purchasing spend $4.92 per $1,000 of revenue on purchasing, versus companies with decentralized models that spend $6.10 per $1,000 of revenue.

Supplier relationship management

With a centralized purchasing system, you’re likely to reduce the overall number of vendors you work with, allowing you to focus on supplier management. This can lead to more strategic relationships and better negotiation tactics.

Improved compliance control

A centralized procurement process allows you to enforce your purchasing and expense policies better, ensuring better compliance with internal rules. It also helps mitigate risk when there’s more oversight, reducing fraud, duplication, and buying from unapproved vendors.

Limitations of centralized purchasing

While centralized procurement offers benefits, it's important to recognize the approach isn't ideal for every business. These are some of the drawbacks and challenges of a centralized purchasing process:

• Reduced flexibility for individual departments: Centralized procurement may not account for the needs of specific departments. For example, a chemistry department at a research university might struggle with the approved vendor list when they look for specific scientific devices.
• Slower response to urgent needs: Because all requests route through one team, there may be a delay in fulfillment, which can hinder the team's response when something urgent comes up. For example, a centralized purchasing team may struggle with orders for emergency supplies.
• Risk of bottlenecks or bureaucracy: There may be an increase in administrative burden on a centralized procurement team that can lead to an increase in paperwork and more layers of approvals, causing bottlenecks and inefficiencies
• Change management and resistance from teams: If your teams are used to autonomy in their purchasing choices, it might be a tough shift toward a centralized model. It’s important to train your staff on the value of centralized purchasing, which also takes time and resources.

When should you implement centralized purchasing?

Centralized purchasing can maximize cost savings, standardization, and strategic vendor relationships. It's best used in these situations:

• Rapid growth or expansion: Let’s say your company is scaling quickly. Your product is taking off, so you’re adding new team members and locations. Centralized procurement helps you maintain consistency in a time of rapid growth, and it gives you a level of control over your budget in an exciting but potentially chaotic time.
• Increasing spend across multiple locations: If your company has different locations buying products from the same vendors, it makes sense to centralize purchasing. That way, you can consolidate orders, reduce waste, and find discounts from volume orders
• Recent issues with compliance or overspending: If your team is overspending or otherwise not following your established purchasing process, centralization helps add a level of oversight to enforce tighter controls over your budget
• Need for better data and reporting: It’s nearly impossible to track spending across multiple locations and departments when they all have their own processes. Centralization provides data across the company, which helps you develop spending insights, better reporting, and ultimately an improved budget strategy.

Centralized vs. decentralized purchasing

Centralized procurement consolidates all buying decisions and processes through a single department or authority. Decentralized procurement distributes purchasing power across multiple departments or business units that make independent buying decisions.

This table highlights the key differences between the two models:

Many organizations also find success with hybrid models that combine elements of both approaches. For instance, a business might approve a specific vendor, but allow separate departments to make their own purchases from that vendor. This way, the vendor relationship remains steady, but departments can manage their own budgets and approvals.

How to implement a centralized purchasing process

Transitioning to centralized procurement requires careful planning and systematic implementation. Following this approach will help you navigate this change smoothly while minimizing disruption to daily operations:

Assess current spending patterns

First, gather purchasing data from across your organization so you can understand:

• Total spending by department
• Total spending by category
• The list of vendors across the organization
• Frequency of purchases
• Unauthorized or unapproved spending
• Duplicate orders and inconsistent pricing

Once you have your data, you need to conduct a spend analysis to gain a deeper understanding of your data. You can do this with spreadsheets and pivot tables, but modern procurement and expense tracking tools like Ramp help automate the process.

Select purchasing software

Utilizing the right technology is a key to implementing a centralized procurement process. When considering your purchasing software options, look for these key features:

• Approval workflows
• Purchase order processing
• Supplier and contract management
• Spend tracking
• Analytics and reporting
• Integration with accounting tools
• Compliance and regulation features

Popular procurement software options include Ramp, Coupa, SAP Ariba, and Procurify.

Roll out in phases and train teams

Once you’re ready to move forward with a centralized purchasing process, communicate it to your team carefully. Use a phased approach to help minimize disruption:

1. Pilot program: Begin by piloting the new process with one department so you can test how things work and fix any pain points
2. Standardize processes across teams: Expand across departments and teams to see how the processes work at scale, and address any new issues that arise
3. Full-team rollout: Finally, work on your plan for the full-company rollout, and continue to collect and address feedback. This way, you address the team’s needs while maintaining cost savings and procurement efficiency.

To ensure success in your full-team rollout, provide your team with clear documentation and training. Change management is complex, but there are a few things you can do to help with the transition and get buy-in from your stakeholders:

• Communicate the benefits clearly and often
• Involve users in the planning stages
• Establish champions or super users within each department
• Share wins across teams

Best practices for implementing centralized purchasing

Follow these implementation best practices to avoid common centralized procurement pitfalls:

• Start with a clear plan, including goals and success metrics
• Loop in key stakeholders to nip resistance in the bud early
• Standardize your procurement procedures, processes, and workflows
• Don’t try to do it all at once; instead, work in a phased approach
• Communicate your plans to your team in a consistent way
• Train team members so you can avoid errors and frustration

Use Ramp to automate your purchasing processes

If you’re looking to streamline your purchasing processes, Ramp can help. Ramp's comprehensive platform is designed to automate and optimize procurement workflows while reducing administrative burden across your business.

With Ramp, you can:

• Streamline your purchasing requests: Effortlessly intake procurement requests using AI that captures every detail, document, and contract immediately
• Find savings opportunities: Gain complete visibility into spending to uncover savings on unused subscriptions, licenses, and memberships, eliminating unnecessary costs and reliance on outside accounting help
• Know your committed spend: Automatically generate purchase orders to get a clear line of sight into upcoming invoices

Explore Ramp Procurement to see how it can help you gain more control over your purchasing processes.